Three Inside Down Candlestick Pattern: A Strong Bearish Reversal Signal

The Three Inside Down candlestick pattern is a bearish candlestick reversal pattern that signals a potential shift from bullish to bearish.

Traders watch for this pattern at the top of an uptrend, seeking confirmation that the bulls are losing control and sellers are stepping in.

This pattern consists of three candlesticks: a large bullish candlestick, followed by a second candlestick that is smaller and bearish inside the first, and finally, a long bearish candlestick breaking below the first candle’s low. It suggests a loss of momentum from buyers and shifting towards selling pressure.

The Three Inside Down pattern is a technical analysis formation consisting of three candlesticks that appear after an uptrend, signaling a trend reversal.

1. First candlestick: A strong bullish candlestick, showing buyers in control.
2. Second candle: A smaller bearish candle that stays inside the first candle’s range, indicating a possible reversal.
3. Third candlestick: A long bearish candlestick that closes below the first candle’s open, confirming that sellers have taken over.

This pattern is considered stronger when the third candlestick closes with high volume, reinforcing the bearish candlestick reversal signal.

The Three Inside Down candlestick pattern is illustrated below.

• Appears after an uptrend, signaling a possible trend reversal.
• Three-candle structure:
  • • First candlestick is bullish (strong up move).
    • Second candlestick is smaller and bearish, staying inside the first candle’s range.
    • Third candlestick closes below the first candle’s opening, confirming the reversal.
• Higher reliability when supported by volume on the third candlestick.
• Works best near resistance levels or at the end of a prolonged uptrend. 

This pattern reflects a gradual shift in market sentiment from bullish to bearish.

1. The first candle confirms that buyers are in control, increasing the price.
2. The second candle shows that buying pressure is weakening, but sellers aren’t fully in control yet.
3. The third candlestick confirms the shift, with sellers taking over and closing below the first candle’s open, which signals a strong trend reversal.

The Three Inside Down pattern suggests buyers have exhausted their momentum, and sellers are starting to dominate the market.

Market Conditions

The Three Inside Down pattern is most effective after a strong uptrend. It works best near resistance zones or at key levels where reversals typically happen.

Volatility Considerations

• In high volatility markets, the pattern may produce false signals, requiring confirmation from other indicators like moving averages or RSI.

• In low volatility markets, the pattern is more reliable, as price action is smoother and follow-through is stronger.

• Stop-loss placement: Above the high of the first bullish candle to limit risk.
• Entry strategy: Enter at the close of the third candle or on a slight retracement to the second candle.
• Profit targets: Aim for previous support levels or use a risk-reward ratio of at least 2:1.

• Third candle fails to break below the first candle’s open: Without this confirmation, the pattern is weak.
• Low volume on the third candle: Weak seller follow-through makes the reversal less reliable.
• Price reverses immediately after breakout: A strong bullish move following the third candle could be a false breakdown.

To incorporate this pattern into a trading system, traders can:

1. Look for an uptrend before the pattern appears.
2. Identify the Three Inside Down formation with three distinct candles.
3. Use additional confirmation from moving averages, RSI, or volume.
4. Set stop-losses above the first candle’s high.
5. Test performance on different markets before using it in live trading.

Below is a simple Amibroker AFL script to detect the Three Inside Down pattern:

// Three Inside Down AFL Code for Amibroker

_SECTION_BEGIN(“Three Inside Down”);

 FirstBullish = Ref(Close, -2) > Ref(Open, -2);

SecondBearish = Ref(Close, -1) < Ref(Open, -1) AND Ref(Close, -1) > Ref(Open, -2) AND Ref(Open, -1) < Ref(Close, -2);

ThirdBearish = Close < Open AND Close < Ref(Open, -2);

 ThreeInsideDown = FirstBullish AND SecondBearish AND ThirdBearish;

 PlotShapes(IIf(ThreeInsideDown, shapeDownArrow, shapeNone), colorRed, 0, High);

 _SECTION_END();

This script helps traders spot Three Inside Down formations on stock charts.

The Three Inside Down candlestick pattern is a strong bearish reversal signal, showing sellers taking control. 

It consists of three candles, where the first is bullish, the second is a smaller bearish candle inside the first, and the third is a strong bearish breakout.

This pattern is best used after an uptrend and with confirmation from other indicators. Traders should always backtest before relying on it in live markets.

Links to articles about other Candlestick Patterns

1. Doji
2. Hammer
3. Inverted Hammer
4. Bullish Engulfing
5. Bearish Engulfing
6. Morning Star
7. Evening Star
8. Shooting Star
9. Hanging Man
10. Piercing Pattern
11. Dark Cloud Cover
12. Three White Soldiers
13. Three Black Crows
14. Dragonfly Doji
15. Gravestone Doji
16. Spinning Top
17. Marubozu
18. Tweezer Top
19. Tweezer Bottom
20. Bullish Harami 
21. Bearish Harami
22. Rising Three Methods
23. Falling Three Methods
24. Bullish Abandoned Baby 
25. Bearish Abandoned Baby 
26. Bullish Kicker 
27. Bearish Kicker
28. Three Inside Up
29. Three Inside Down
30. Upside Gap Two Crows
31. Mat Hold
32. Upside Tasuki Gap
33. Downside Tasuki Gap